I have a new piece up over at CoinDesk: What Block Chain Analysis Tells Us About Bitcoin. Note: the title of this blog post was the original title of the CD article (we switched it so that the average reader would find it more of interest).
I really have to thank John Ratcliff for his time, effort and talent for fusing blockchain data with a visualization engine. Also special thanks to Jonathan Levin for his analysis of what is going on (I have quoted him several times now, including my recent mining piece regarding China).
My own view (not necessarily anyone else’s) is that this data shows that while bitcoin was, on paper, built to be an electronic cash system (a payments system), that in practice it is primarily used as a store-of-value. Yet in a twist, even the run-up of a $1,000 token last fall did not bring the long-term savers out of their cold sleep. And more to the point, it is doubtful that even if some of these old holders wanted to sell that in practice they could not because liquidity is very thin and they would likely create huge pay walls in order books that would take days and weeks to plough through.
Thus the question is, what could incentivize long-term holders to actually use the network as a payment platform, to exchange their tokens for wares? My own view is nothing will in the short-run. BitPay, Circle and Coinbase are all neat, innovative and have smart people working for them but in their current form they basically just serve early adopters with large quantities of bitcoins to dispose of. The transactional volume only spikes during price rallies which essentially means that on-chain bitcoins only move in the midst of large market movements. What this likely means is that, sans the black market, very few people buy bitcoins to spend on conventional goods and services; real economic activity and commerce is still quite low.
As a consequence, if entrepreneurs are looking to capitalize somewhere in this market segment, they may want to incorporate this thesis into their business plan: that most activity involves savings, thus you should build products and financial instruments to hedge the savings from volatility.
Perhaps this is just a temporary phenomenon. Maybe, as some advocates hypothesize, if and when prices reach a stable value at several thousand dollars this behavior will change. Fortunately for all interested parties, the blockchain shows us what is actually happening. It is the real asset.
Update: Here is John Ratcliff’s latest pie chart based on the same methodology from the article: